In stride with America’s 250th anniversary celebration, it’s worth noting George Washington didn’t need to win every battle to clinch the Revolutionary War. Unlike many 18th-century European generals, Washington focused on maintaining the Continental Army’s endurance, avoiding catastrophic losses and wearing down the British over time.
Investors fighting inflation today can take a similar approach with their fixed-income portfolio: The goal isn’t for each bond investment to outpace inflation every year, but rather to outmaneuver it by preserving purchasing power, generating dependable income and supporting an overall portfolio that can weather changing economic conditions.
Fortunately, today’s bond market offers investors competitive yields. As of July 21, the 30-day yield for core U.S. bonds was 4.6%, according to data from the Bloomberg U.S. Aggregate Bond Index. That’s more than three times higher than what investors received from core U.S. bonds around the same time in 2021, which was only about 1.5%. That gap alone explains why bonds have re-earned a place in inflation-conscious portfolios.
The total returns for the U.S. Aggregate Bond Index over the last three, five and 10 years have been 4.35%, 0.45% and 1.7%, respectively, through June 30. BlackRock’s expected, central return for aggregate bonds over the coming 10 years is 3.91%.
To better understand how fixed income can help investors keep pace with inflation, we asked some expert strategists and fixed-income specialists to weigh in on three strategic topics:
Where Is Inflation Headed
While the consumer price index (CPI) fell to 3.5% in June, leading market strategists’ outlook on whether inflation will continue to cool in the short run remains mixed.
Kristina Hooper, chief market strategist at Man Group, says AI capital expenditure, restrictive immigration policy, tariffs and the current war in the Middle East will keep inflation elevated for a while longer. She comments, “I expect inflation will remain persistently and materially higher than the Fed’s target of 2%. More specifically, I expect core CPI to be at or above 3% year over year for the next one to two years.”
Chi Chen, managing director and portfolio manager in BlackRock’s Fixed Income Investment Group, on the other hand, believes core inflation is likely on a downward slope. She says her team expects “core inflation to moderate through the second half of the year as some of the earlier tariff effects fade and housing inflation continues to cool. Recent inflation data reinforce our view that core inflation has likely moved past its local peak, and the direction of travel should be continued moderation barring a significant new economic shock.”
Meanwhile, the Federal Reserve Bank of Cleveland’s own 10-year outlook for core inflation is currently 2.43%.
With strategists split, the more actionable question for investors isn’t which forecast wins, but how to position a portfolio that holds up either way.
It’s easy to compare bond yields and assume the highest number represents the best investment strategy. But a bond’s stated yield tells only part of the story. What ultimately matters is a portfolio’s total return, which is the amount after accounting for inflation, taxes and fees.
A bond yielding 5% may sound attractive, but if inflation averages 4%, your purchasing power has increased by only about 1% before taxes.
Jeff Given, senior managing director, portfolio manager and head of developed-market fixed income at Manulife Investment Management, notes, “Real yield is the appropriate metric to focus on if your objective is to measure whether fixed income yields are exceeding prevailing inflation rates. On a positive note, nominal yields are well above 20-year averages and provide an attractive opportunity to generate a high level of income exceeding current inflation levels.”
In practical terms, his team estimates real 10-year yields are running about 1.5 percentage points above their 20-year average versus core CPI – a meaningful cushion for investors focused on preserving purchasing power.
Professional bond managers often focus less on headline yields and more on whether a portfolio can deliver positive real returns over a full market cycle. That’s practical wisdom for investors, too. Maintaining purchasing power over time is more important than simply collecting income today.
One of the biggest decisions bond managers make is how much duration, or interest-rate sensitivity, to maintain in their portfolios.
If inflation falls and interest rates decline, longer-term bonds generally perform well. If inflation remains elevated and rates stay higher for longer, shorter-duration bonds may hold up better while giving investors opportunities to reinvest at higher yields as bonds mature. Bonds are inherently sensitive to changes in interest rates and are subject to default risks as well.
Still, rather than making an all-or-nothing bet, many professional managers build portfolios designed to perform reasonably well under several economic scenarios.
Washington took the same approach on the battlefield. Aside from the occasional calculated strike, like the Delaware crossing, he generally avoided staking the entire war on a single engagement, choosing instead to preserve his army’s flexibility to fight another day. Diversification across maturities, sectors and credit quality serves a similar purpose in a bond portfolio: It helps investors avoid relying on a single forecast proving correct.
“It’s still the ‘Golden Age of Income,’ but the current phase requires greater selectivity,” Chen says. “Income remains the primary driver of fixed-income returns, while the move higher in real yields means investors are beginning to get better compensated for owning some duration.”
Winning the Campaign, Not Every Battle
Washington understood that winning the war required patience, discipline and the ability to adapt as circumstances changed. Investors face a similar challenge with inflation. No one knows exactly where inflation or interest rates are headed next. But by focusing on real returns, diversifying across fixed-income sectors and building a portfolio that can adapt to multiple outcomes, investors can improve their chances of preserving purchasing power over the long run.
As you evaluate your own fixed-income strategy, remember that successful investing isn’t about winning every battle against inflation. It’s about building a portfolio that can win the campaign.
